What do people actually know about personal finance?
Not much, it seems...

Friday, January 20, 2017

Our hopes for the future

Many challenges await
the new president, some of great urgency. In his inaugural address, he expressed
a desire for action. There are many areas of action but one especially
pernicious issue has several relatively simple solutions. That is the problem
of financial illiteracy.

Our research shows that
financially knowledgeable individuals make smarter financial decisions and achieve
better outcomes; they are more likely to save, plan for the future, invest, and
become contributing members of society; and less likely to take on expensive
debt.

However, millions of
Americans lack even a basic understanding of personal finance. In 2015, only 32
percent of Americans could answer correctly three basic questions on financial
concepts like interest rate, inflation, and risk diversification. This
“financial illiteracy” undermines their quest for a better future.

Consider debt. The number of student loan
borrowers has nearly doubled in the past decade, and many borrowers do not
understand the effects of that borrowing beforehand. According to our research,
54 percent of student loan holders did not try to calculate their monthly
payments before borrowing, and 53 percent said that given the chance, they
would do things differently. This debt causes financial stress: 37 percent of
people with student loan payments due said they were late with a payment at
least once in the last 12 months.

Debt is also a growing problem for older
Americans, threatening their retirement security. And speaking of retirement,
only 39 percent of Americans have even tried to determine how much money they
will need in later life, a figure barely changed since 2009.

Financial fragility is another problem
exacerbated by limited financial literacy. Some 34 percent of Americans said that
they could not come up with $2000 if an unexpected need arose within the next
month. We need to put in place policies that improve individuals’ financial
security both in the long-term and the short term. We need to equip people with
the knowledge to make quality financial decisions around debt, and we need ways
to encourage American families to build “rainy day funds” for emergencies.

There is an urgent need for policy action to
encourage the spread of financial education so that people in all walks of life
can make savvy financial choices. Parents and teens would benefit from having a
better grasp on how to pay for college. Millions of Americans would be more
likely to build emergency savings if they realized their importance. People
also would benefit from a better understanding of how to save for retirement.
Our research shows that the mere act of planning for retirement is a strong predictor
of retirement wealth.

Some schools already provide financial education
for all students. Workplace financial education and financial wellness programs
can also impart essential knowledge. Government incentives for both employers
and schools to provide financial education could spur new solutions to the
problem of low financial literacy.

If more schools and employers provided financial
education, millions of American would have the tools to build better lives for
themselves and for us all. This is a vision for the future we hope for.

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About Me

Annamaria Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.